Small Business Optimism Inches Up

Date: May 13, 2014

Indianapolis, May 13,
2014- April’s Small Business
Optimism Index rose 1.8 points to a post-recession high of 95.2. The economy
continues to perform modestly and April’s index followed suit as it crossed the
95 marker for the first time since 2007. Seven Index components improved,
one was unchanged and 2 fell.

“We’re cautiously
optimistic, especially here in Indiana where we’ve made big improvements in the
business climate,” said NFIB Indiana
State Director Barbara Quandt.
“Health insurance and federal regulations still worry small business
owners but there’s no serious talk of tax increases and consumers seem to be
feeling a little more confident, which is what the economy needs.”

NFIB Chief Economist Bill Dunkelberg said that while the uptick is good news, it’s
too soon to pop the champagne.

“April’s Index did pass
the 95 mark that seemed to block any progress in optimism for the past five
years. However, the Index is still 5 points below the average reading from 1973
to 2008, and far from what is considered expansion levels. This reading can
only be characterized as a high end recession reading,” said Bill Dunkelberg.
“Small business confidence rising is always a good thing, but it's tough to be
excited by meager growth in an otherwise tepid economy. Washington remains in a
state of policy paralysis. From the small business perspective there continues
to be no progress on their top problems: cost of health insurance,
uncertainty about economic conditions, energy costs, uncertainty about
government actions, unreasonable regulation and red tape, and the tax code. So
while the improvement is welcome, as long as small business owners continue to
have negative views owners about the future, the 95 number may fade.”

A review of the April
indicators is as follows:

•
Labor Markets.NFIB owners increased employment by an average
of 0.07 workers per firm in April (seasonally adjusted), weaker than March but
the seventh positive month in a row and the best string of gains since 2006.

The remaining 74 percent
of owners made no net change in employment. Fifty-one percent of the
owners hired or tried to hire in the last three months and 41 percent reported
few or no qualified applicants for open positions. GDP didn’t grow in the
first quarter, so not a lot of new workers were needed. April looked a
bit better as the economy “thawed”. Weather was bad in the first quarter
but since the U.S. was not uniformly “frozen”, the weakness in employment and
GDP growth can’t be blamed entirely on Mother Nature

• Job
Creation.Twenty-four percent of all owners reported job
openings they could not fill in the current period (up 2 points). This
suggests that the unemployment will ease a tenth of a point or more.
Fourteen percent reported using temporary workers, up 1 point from March.
Job creation plans reversed a recent negative trend and rose 3 percentage
points to a seasonally adjusted net 8 percent.

•
Sales. The net percent
of all owners (seasonally adjusted) reporting higher nominal sales in the past
3 months compared to the prior 3 months improved 4 points to a net negative 2
percent, far better than the negative 31 percent readings in 2009. This is the
best seasonally adjusted reading since early 2012 when the economy temporarily
reach a more normal growth path.

Expected real sales
volumes posted a 2 point decline after a strong 9 point gain in March, falling
to a net 10 percent of owners. While
falling a bit, it is still the third highest reading since early 2012.Fifteen
percent cite weak sales as their top business problem, high but approaching
levels experienced in “normal” times.

Two percent reported
reduced worker compensation and 23 percent reported raising compensation,
yielding a seasonally adjusted net 20 percent reporting higher worker
compensation (down 3 points after a 4 point gain in March), but still among the
best readings since 2008. A net seasonally adjusted 14 percent plan to
raise compensation in the coming months, unchanged from February and March. The
reported gains in compensation are now solidly in the range typical of an
economy with solid growth. Although GDP growth in Q1 was less than
expected (about zero), the small business sector continues to show signs of
progress, small as they may be.

•
Credit Markets.Credit continues to be a non-issue for small
employers.In April, just five percent of the owners reported that all
their credit needs were not met, 1 point above the record low. Thirty
percent reported all credit needs met, and 53 percent explicitly said they did
not want a loan. Only 1 percent reported that financing was their top
business problem (tied with the record low) compared to 22 percent citing
taxes, 20 percent citing regulations and red tape and 15 percent citing weak
sales. Small business owners are far more concerned about taxes, regulations
and health care costs than financing issues.

•
Inventories.

The pace of inventory reduction
was steady, with a net negative 6 percent of all owners reporting
growth in inventories (seasonally adjusted). Reductions
are good if in response to strong sales, but not so good if it is in
response to weak sales. Owners are satisfying orders with existing inventory
but not ordering new stocks. The net percent of owners viewing current
inventory stocks as “too low” lost a point, falling to a net negative 1
percent, historically a “lean” reading. Sales trends did improve, although
remained historically weak and probably insufficient to produce a
substantial reduction in inventories. The solid reading for
expected real sales contributed to the need to rebuild with the net
percent of owners planning to add to inventory stocks gaining 2 points to
a net 3 percent, following a large 6 point gain in March. While
inventories have been building solidly at the national level, it appears
that the small business sector is adding only a little to the accumulation
of stocks reported in the GDP accounts.

•
Inflation. Seasonally adjusted, a net 12 percent of
owners raised selling prices, up 3 points after an 8 point rise in March.
Twenty-five percent plan on raising average prices in the next few months
(up 2 points). Only 3 percent plan reductions (unchanged), far fewer than
actually reported reductions in past prices. Seasonally adjusted, a net
22 percent plan price hikes (up 3 points). If successful, the economy
will see a bit more “inflation”.